Why Long-Horizon Markets Behave Strangely
A contract settling in two years is priced by people who must tie up capital for two years. That single fact explains most of what looks odd about them.
Markets on events years away look mispriced in consistent ways. They mostly are not. The pricing is a rational response to a cost that short-dated markets barely have.
The capital problem
Buying a contract at 30 cents that settles in two years means committing 30 cents for two years. Selling one at 30 means committing 70 for two years.
Whatever your capital could otherwise earn, two years of it comes out of any return. On a contract where the whole opportunity is a few cents of mispricing, that cost is decisive. Capital lockup is the arithmetic in full.
What follows from it
Wide spreads. Makers quoting a two-year contract are financing inventory for two years. The spread has to pay for that.
Thin books. Fewer participants want to commit capital for that long, so there is less of everything.
Persistent apparent mispricing. A contract five cents away from fair value is not worth correcting if correcting it means locking a dollar for two years. The mispricing survives because fixing it is unattractive, not because nobody noticed. Persistent versus temporary gaps.
Compression toward the middle. Extreme prices are less common than they should be, because both extremes are capital-expensive to trade. A market that ought to be at 3 sits at 7 because selling it means committing 93 cents for years to collect 7.
The tail is worse here than anywhere
A long-dated contract at 5 cents is the least attractive thing on any exchange to sell, and one of the most attractive things to buy for anyone who wants a lottery ticket. The favourite-longshot bias is at its strongest precisely here, and for entirely mechanical reasons.
Reading a long-dated price
Discount the informational content. A thin, wide, long-dated market is a few opinions with a large capital charge attached. It is not a well-aggregated forecast. Where crowd wisdom runs out.
Expect drift toward the extremes as time passes. Not because anything changed, but because the capital cost falls as the horizon shortens, letting the price move to where it should be. Some of what looks like news-driven movement in the final months is this.
Compare against a base rate rather than against your intuition. The prices here are unreliable enough that your own outside view is competitive. Base rates first.
Cross-venue gaps on long-dated contracts
These are the largest gaps in any comparison table and the least actionable. Both sides are thin, both sides are wide, both sides are stale, and closing the gap requires two years of committed capital on both legs.
A ten-cent gap on a contract settling in two years is worth less, properly annualised, than a one-cent gap on something settling next week. Any comparison table that does not express gaps as returns over the actual holding period will rank these at the top, and it will be wrong to do so. How to read a gap table and gap size versus liquidity.
What they are good for
As a slow-moving indicator of how expectations are shifting over months. The level is unreliable; the direction of change over a long period is more informative than the number itself. Top movers is where sustained drift shows up.
Next
Election markets, the category most people arrive for.
Educational content only. Nothing here is financial advice, a solicitation, or an offer to trade. Prediction markets can move against you and a position can lose its entire value. Where this guide describes a difference between venues it describes a theoretical cross-market edge in observed prices, which is not a profit: fees, spreads, capital lockup, transfer time and differing settlement rules all come out of it first.
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